In Federal Courts, the Worst Rise to the Top

A New York City federal jury has spoken, and its message is ominous: federal prosecutors are empowered to criminalize actions for which there is no statutory prohibition. To put it another way, the government has pulled criminal charges out of thin air – and journalists are cheering.

NEW YORK -- All three defendants in the first college basketball corruption trial were found guilty of conspiracy to commit wire fraud on Wednesday.

A jury found James Gatto guilty on all three of his counts and Christian Dawkins and Merl Code were found guilty on both of theirs.

Gatto is a former Adidas employee, Code a former consultant. Dawkins is a former aspiring sports agent. The outcome of the trial stands to have widespread impact on college athletics in the coming months and years, be it in the continued reform of NCAA bylaws or by way of punishments against coaches and/or schools down the road.

The U.S. Attorney's Office in the Southern District of New York successfully argued the trio of men defrauded the University of Louisville and the University of Kansas in the process of helping funnel money – and recruits – to those schools, with the intention of later signing prospects to endorsement deals.

All three were found guilty on wire fraud and specific conspiracy to commit wire fraud against the University of Louisville. Gatto's third guilty count was a conspiracy to commit wire fraud against the University of Kansas.

(I add that the Southern District of New York that gave us Rudy Giuliani’s predations in the 1980s, the Martha Stewart non-inside trading case, and the awful Frank Quattrone conviction which later was overturned. Names like Giuliani, James Comey, and Preet Bahara line the wall in the Abusive Prosecutors Hall of Shame.)

The charges sound ominous: wire fraud, conspiracy to commit wire fraud, and defrauding the University of Louisville and the University of Kansas. But when we break down the actual charges and what they mean, a different picture emerges. Before doing that, however, I need to explain how the National College Athletic Association (NCAA) operates.

Despite the fact that the NCAA is a multi-billion dollar enterprise in which many coaches become multi-millionaires, the most important factors of production – the athletes themselves – receive only in-kind payments in the form of tuition and fees, room and board, and books. Given the high cost of a college education, this kind of payment for those fortunate to earn full scholarships (and many collegiate athletes are not on full rides) is not peanuts, but it also is clear that a number of athletes at top-ranked programs create value for the universities that mostly goes into the pockets of others.

With apologies to Karl Marx, we are looking at a form of appropriation of surplus value, although speaking as a former collegiate athlete who was on two NCAA Division-I championship teams, I hardly would think that athletes are exactly the downtrodden Marxian proletariat. That being said, however, if these high-flying sports programs did not bring billions of dollars into the coffers of universities and the NCAA itself, then football and basketball coaches would not be the highest-paid state employees at public universities like the University of Alabama and the highest-paid people on campus at private institutions like Duke University.

According to the NCAA, even though coaches, athletic directors, and many NCAA officials are highly-paid, any payments to the athletes that help make this financial largess possible would disturb the “aura” of “amateurism” in college sports , as well as “corrupt” the special notion of the “student-athlete.” Furthermore, there is the view by some that the very presence of high-profile athletes and coaches on an august university campus is corrupting in itself.

(The idea that higher education, which has succumbed to political correctness in the extreme, and which has embraced “science” that recognizes only politically-correct outcomes, is “corrupted” by people engage in activity for which results are not fixed simply is laughable. Enough said.)

Thus, we have the situation in which payments to owners of a key resource in a multi-billion-dollar industry are severely limited and distorted by a governing body – and then people are shocked when competition for that key resource spills out in other forms. In most situations where something of value is produced, payments to resource owners are expected; college sports, however, calls such payment a form of corruption, a situation which breeds hypocrisy, cynicism, and outright cheating.

Nick Saban, the hyper-successful football coach at the University of Alabama, pays his players. Urban Meyer of Ohio State pays his players. Kirby Smart of Georgia pays his players, Roy Williams, the basketball coach at the University of North Carolina, pays his players, and so on. All coaches deny the obvious not because they are by nature sleazy liars, but rather because the system demands they lie to protect the academic façade that has become higher education. The system requires that people lie to prop up everything else.

Enter the Feds

The entrance of federal prosecutors into this situation is relatively new, as only one time before has a U.S. attorney tried to criminalize the passing of money to grease the recruiting wheels of college sports. That was the 2005 conviction of Logan Young, a booster for the University of Alabama who lived in Memphis, Tennessee.

Federal prosecutors claimed that Young bribed a high school football coach in Memphis to steer a prized recruit to Alabama, and the jury dutifully convicted. I wrote an article condemning both the charges and the verdict , noting that Young was convicted of “crimes” that by themselves (crossing state lines and withdrawing money from a bank) were not illegal acts and that even the so-called underlying act of bribery actually was not even a federal crime, but rather a state crime and Young had not even been charged in Tennessee with bribery, much less convicted in a court of law. The actual federal charges consisted of what Candice E. Jackson and I have called “ derivative crimes ,” which are so-called illegal acts that are derived from other “illegal” acts and finally an actual underlying crime.

Take the “crime” of wire fraud, for example. Assume that I have run a financial scam which actually breaks the law, and I use the Internet or the telephone system. The feds can charge me with “wire fraud,” which is nothing more than using the “wires” in the commission of a crime. There is nothing inherently criminal about using a telecommunications system, but it is easier to convict someone of using a computer or the phone lines than it is to convict them of the actual crime of defrauding others. Thus, when one sees that someone is indicted in federal court, it is almost certain that the charge will be either wire fraud or “conspiracy” to commit wire fraud, which is even easier to prove. What one will rarely see is someone convicted of an actual criminal act.

The latest convictions in the so-called corruption scandal fit right into the “derivative” categories I have described. Note that jurors did not actually convict anyone of fraud itself, nor did they go after the athletes that allegedly were paid up-front money. Instead, prosecutors claimed that by funneling money to the recruits and their families, they made those athletes ineligible by NCAA standards, which then “defrauded” the institutions with whom the basketball players had signed, the University of Louisville and University of Kansas, both of which are powerhouse programs with multiple NCAA men’s basketball championships to their credit.

Whether or not we are dealing with criminal fraud is up for debate, since no athlete or agent/booster ever has been convicted in an actual court of law for the crime of defrauding a university. Furthermore, this is the first time that the fraud statutes ever have been used in quite this way. Federal prosecutors made bribery the underlying “crime” when they charged him with withdrawing money from his bank in amounts under $10,000 (to avoid detection by authorities) and crossing state lines. No one ever accused him, however, of defrauding anyone.

The latest convictions are troublesome in that they involved a brand new tactic in the ever-widening interpretation of federal fraud statutes. Prosecutors claimed (successfully, at least for now) that because these people funneled money to prospects allegedly without knowledge of Kansas and Louisville coaches and officials , they made the players ineligible to pay under NCAA rules. Note, however, that it was the players and their families that chose to accept the money, but prosecutors failed to charge any of them even though they were party to the alleged deception.

Not surprisingly, coaches and officials at both universities strongly denied they had any knowledge of the payments, but their positions defy logic. First, and most important, the defendants’ actions were directed at steering these athletes to Kansas and Louisville, and it is highly doubtful that they picked these programs at random. Second, the underground system involving payments to players and families does not operate independently of the coaches. Indeed, the system would make no sense unless coaches were involved.

As for claiming criminal behavior, the NCAA is a private organization and its rules do not have – and should not have – the force of law and especially criminal law. At most, issues like this belong in civil, not criminal courts. An athlete or coach should not be jailed for simply violating an NCAA rule (and the rules are legion and have metastasized as though they were part of the Federal Register, making it nearly impossible for any athletic program to be “clean”). However, in order to criminally defraud a university, an accused person would have to be involved in some sort of relationship with that institution, and that would have to mean that the coaches were in contact with the aspiring agents and representatives, something they already have denied.

In fact, the prospective athletes and their families were the ones that actually received the monetary payments that compromised the players’ NCAA eligibility, and they were the ones in touch with coaches and university officials. They understood that they had been given money the NCAA says they cannot have, so if anyone engaged in fraud, it is they. However, it is much easier to go after aspiring agents and representatives of shoe companies than 18-year-olds and their families, which often are black and poor. The media will cheer when an adult who has offered a teenage athlete money the NCAA says is out-of-bounds is convicted in court and faces years in prison, as opposed to a poor, African-American youth whose only “crime” was having an exceptional ability to play a sport, or maybe his parents.

Not surprisingly, no one in journalism has taken a hard look at the legal ramifications of what federal prosecutors have done. During the 1980s, Rudy Giuliani as the U.S. attorney in Manhattan used the RICO statutes to destroy entire firms, doing billions of dollars of damage, but the media following him was utterly adoring as Rudy did battle against the so-called demons of capitalism. No one asked whether or not it was wise in the long run to use criminal law in a way it never had been used before in order to attain political ends that would result in productive companies lying in ruins and their executives sitting in prison. It served Giuliani’s political aspirations and journalist had their stories, so all was well.

Likewise, we have people facing prison, people who almost certainly had contact with college coaches that now deny ever having knowledge of those contacts. The accused were working in the shadow regions of college sports, a situation created by the NCAA’s arcane “amateur” rules that routinely are broken, and suddenly federal prosecutors have decided that these people are criminals.

This is not going to end well. First, and most important, the NCAA rules guarantee that owners of key resources are going to seek payment outside the official guidelines, which means there is going to be fresh meat for prosecutors as long as those rules exist. Second, the popularity of these verdicts mean that other prosecutors are going to want in on the action, as popular convictions can be a springboard to future political success. (Just ask Rudy Giuliani how the Wall Street prosecutions benefited him even though it caused billions of dollars in economic harm.) We can expect further twisting of federal criminal law to benefit prosecutors.

And, finally, the twisting of the law itself causes untold social harm. When actions that once were not considered to be criminal suddenly are interpreted differently, even though the underlying statutes remain unchanged, it creates legal uncertainty that benefits political animals in the federal criminal justice system. F.A. Hayek noted that in government, the worst among us generally are the ones that make it to the top, and in the world of federal law, we see Hayek’s warnings come true.

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.

If the media cared much about the plight of small business owners, we'd see many more stories about how government regulations, taxes, and mandates make life more difficult for both owners and their employees.